This chapter analyzes employees' investment behavior. Investments, such as additions to plant and equipment, improvements in employees' skills, reorganization affecting production domains, and changes in responsibility on an organization's employees are typically believed to reflect the interests of the funding authority. However, an employee often can use resource diversions to make investments that increase his future welfare. Thus, the long-run analysis of economic behavior within organizations should take into account employees' investment behavior as well as the funding authority's.

Employees' investment behavior is determined by: individual employees' time preferences and utilities derived from particular resources; the nature of investment opportunities and their returns; and constraints on the resource diversions available for investment. The constraints on resource diversions of course include responsibility, which also can restrict the particular investments that employees may make. Another constraint is the funding limit on the total resource diversions of an organization's employees in any time period, to be analyzed in Chapter 8. Employees' investments are often directed to increasing the future resource diversions allowed by responsibility. Here, it is assumed either that the resource diversions presently allowed by responsibility sum to less than the funding limit or that employees seek alternative benefits from diversions within this limit that yield them more utility.

This chapter focuses on the nature of employees' investment opportunities, particularly those that influence suborganization and the coordination of employees' activities. The discussion first illustrates how investments can provide returns both to employees and to employers.